Vitality Re IV medical benefit ILS priced well down due to demand

Once again the demand for a new insurance-linked securities transaction has been significantly above the volume of notes being issued enabling the price to be pushed down to well below the range it was initially marketed at. Aetna’s latest Vitality Re IV Ltd. (Series 2013-1) medical benefit linked securitization saw a great deal of demand when it went to market, with many investors likely ending up disappointed as the deal was not increased in size.
It’s testament to the attractiveness of the Vitality Re series of deals from Aetna, a timely diversification opportunity which at each issuance has been extremely well received. This latest deal in the series of catastrophe bond type transactions, which provide Aetna with a source of collateralized reinsurance cover from the capital markets for medical benefit claims rate increases, has been as popular as its predecessors and was signficantly over-subscribed, as much as three times according to investors.

The Vitality Re IV transaction began marketing as a two tranche deal, with a $105m Class A tranche of notes which cover claims payments above a medical benefit ratio (MBR) exceeding 102%, which equates to an attachment point of $765m based on ceded premiums of $750m. The Class B tranche began marketing as a $45m tranche covering claims payments above a MBR ration of 96%, an attachment point of $720m based on the ceded premiums.

So the Class B tranche is the riskier of the two, with the lower attachment point, having an expected loss of 25bps, while the less risky Class A tranche has an expected loss of 1bp.

Both tranches have remained the same size, despite the over-subscription demonstrating that investors would have enabled Aetna to increase the deal size. Aetna have three other Vitality Re deals which are still providing cover, each sized at $150m, so with this latest deal they have a $600m source of collateralized capital market backed reinsurance and so did not need to increase this transaction size. The other Vitality Re deals are; Vitality Re III Ltd., Vitality Re II Ltd. and Vitality Re Ltd.

When a deal faces as much demand as Vitality Re IV it is only natural that the pricing feels the pressure from the demand and gets pushed down. In the case of this deal it has dropped quite significantly, lessening the cost of the transaction over its lifetime for Aetna.

The $105m Class A notes were originally marketed with a price guidance range of the collateral investment yield plus 350-425 bps. The Class A notes priced down at 275 bps (2.75%), a drop of 21% from the lower end of the original pricing range, or 35% from the upper.

The $45m Class B notes saw a similarly large drop in pricing, having begun marketing with a range of 450-525 bps and pricing at 375 bps (3.75%), a drop of 16% from the lower end of the price guidance range or 28% from the upper.

By sticking to its strategy with the Vitality Re deals Aetna has successfully added another $150m of four-year aggregate reinsurance protection with Vitality Re IV, expanding its capital markets cat bond type cover to $600m. Each time it issues a Vitality Re ILS deal the investor community has received them very well and pricing has been attractive. The Vitality transactions have become a value diversification opportunity for the ILS market.

Subscribe for free and receive weekly Artemis email updates

So if the Class A notes only have an expected loss of 1bps they are paying 275 times that to ceded this risk to the capital markets? This of course doesn’t include the feed from bloodsuckers such as Goldmans.

Either the underlying model is under-pricing the risk or investors are making off like bandits.